SELF-SELECTION AND ADVICE IN VENTURECAPITAL FINANCE

In financing start-up firms, venture capitalists carefully select among alternative projects,design incentive compatible financial contracts and support portfolio companies with valueenhancing managerial advice. This paper considers how venture capitalists can induce selfselectionamong entrepreneurial firms with different qualities by designing appropriatecontracts and offering commercial support. We study the efficiency of the competitive marketequilibrium with respect to the level and quality of entrepreneurship and the level of effort byentrepreneurs and venture capitalists. We also provide comparative statics results with respectto basic preference and technology parameters.